Key Lessons from Islamic Financial Innovation

ISLAMIC banking has gained increased global prominence both among theocratic countries and non-Islamic countries since 1975 after being endorsed and established by the Organisation of the Islamic Conference (OIC).
It forms part of the broader and comprehensive Islamic financial systems that encompass insurance companies takaful, leasing companies, commodity trading organisations as well as equity funds. Evidence points that there are major banking institutions in Europe such as Lloyds Bank that have recently adopted both the Islamic principles of banking and the traditional conventional banking practices. Sharia compliant finance is quickly emerging in developed financial markets and the emerging financial markets are catching up. To date there are close to 10 European countries that include France , Germany and the United Kingdom that have successfully incorporated Islamic banking system into their financial systems.
Capital and bond markets have also followed suite: The Tokyo Stock Exchange (TSE), FTSE SET Sharia Index and the FTSE -JSE Sharia Index are examples of markets that have registered Sharia compliant stocks. Africa appears to be emulating the trending Islamic banking practices in the rest of the world. Nigeria has set the pace were their capital market issued Islamic bonds sukuk worth N11,4 billion under the Osun State to raise funds for social infrastructure development and in South Africa major banks have amalgamated conventional and Islamic banking.
Islamic financial markets were regulated dating back to Prophet Muhammad’s time, financial markets were regulated to guarantee that they operated within framework of the divine guidance. Hisba (market regulation) clearly outlined how markets are supposed to be regulated to ensure divine guidance compliance. When Islamic Finance is managed by pure Muslims they ensure that they guide against faith purity contamination. Faith purity contamination is where by money that is considered haram (prohibited or unlawfully gained) is mixed with funds from halaal activities (approved business activities or lawfully gained)
What is Islamic banking and Islamic finance?
The flow of funds between savers and investors in an economy succinctly depicts the purpose of banking. Like conventional banking, Islamic banking’s purpose is also to enable flow of funds between the surplus and deficit units within the economy. One important differentiator is the application of Sharia law to banking and finance in Islamic. Sharia law is a law that comprehensively governs the religious rituals and the aspects of day to day life. The Holy Quran unambiguously prohibits interest (Riba) thus it is unlawful to engage in practices that involve interest.
The following key principles guide Islamic finance:
1) Riba Haram (Prohibition of interest on transactions );
2) Materiality (Financing must be linked to real assets);
3) Engagement in immoral or ethically problematic businesses not allowed (e.g, arms manufacturing or alcohol production); and
4) Returns must be linked to risks.
Islamic banking and finance therefore involve interest free (ar-riba) which is pivotal as one of the objectives of Islamic welfare foundations. Interest, gambling, speculative transactions tend to concentrate wealth in the hands of the minority while the majority remain poverty stricken. Divergent from Islamic banking and finance conventional banking and finance are hinged on making a profit and thus the practice of interest is central to financial systems. Unlike Islamic financial systems that are welfare-rooted, conventional financial systems are more profit driven, capitalistic and obligors are not considered as partners. One of the most important key fundamentals of Islamic finance is that it is universal and multicultural. Islamic finance modernism is open to any innovations that are in resemblance with its principles.
Islamic banking (participant banking) refers to an arrangement of banking activity that is consistent with the principles of the Sharia (Islamic law) tailored and protected by Islamic economics. The principle deals with universal appeal and emphasis on moral and ethical values in all dealings of human transactions.
History of Islamic banking and Islamic finance
In 1970 finance ministers of Islamic nations gathered in Karachi, Pakistan to deliberate on how best Islamic financial systems can be set up. In the subsequent years several other conferences were held in an effort to accelerate the establishment of Islamic financial system these included the following International Conference on Islamic Economics was held in Mecca, Saudi Arabia in 1976 and the International Economic Conference in London 1977.
As a result the Islamic Development Bank was birthed. The years that followed witnessed the growth of the Islamic financial organisations such as Dubai Islamic Bank and the Faisal Islamic Bank with branches in Sudan and Egypt.
In many of these countries establishing interest free banking was an initiative of private partnerships with governments playing minimum roles. However, with time, government’s role shifted and it became more involved, ultimately resulting in the sprouting of interest free banking institutions globally.
Opportunities f.or Islamic banking and finance for Africa
Islamic finance is fast becoming a formidable tool for fostering and financing developmental projects in both Muslim and non-Muslim states. For the past decades there has been overwhelming evidence that Islamic finance have the potential to eradicate extreme poverty and enhancing shared prosperity. Africa is lacking behind in terms of development, but our mother continent is rich with vast minerals and land in abundance for tillage. Islamic finance principle enables people to share risk and returns equally as compared to our capitalist conventional banking. Islamic banking products can be utilised to finance developmental projects in Africa, offer credit facilities to both companies and individuals and enhance productivity. Many small to medium enterprises have faced the full wrath of capitalist conventional banking and succumbed before they reach their full potential.